One might postulate that the price of Bitcoin and Chinese housing have no relevant correlation with each other.
Think again!
Granted, Chinese citizens aren’t denominating their mortgages in Bitcoin to snap up their ritzy Shanghai townhouses overlooking the Bund.
I don’t mean that.
But Bitcoin is an asset just like stocks, bonds, and commodities, and is exposed to one-off events that shake out the financial system.
What’s brewing in the Middle Kingdom?
China’s biggest property builder, Evergrande, has since collapsed into one of the largest restructurings in global property history.
Add it up, Chinese bank deposits are estimated at over $45 trillion, more than 2x the US.
Would any Chinese financial crisis lead to an epic flight to fiat alternatives?
Does nobody recognize that this is a planned liquidity drain of the property market in China by the CCP?
All escape "exits" have already been shut. You can't even buy paper gold in China either. Forget Bitcoin!
So I don’t believe that the potential disorderly selling of Chinese flats or the bust of a major property developer would end up boosting the price of Bitcoin because the Chinese government has made it abundantly clear that Bitcoin remains a hard prohibition for its citizens, with enforcement expanded through 2024.
If there is a 20% dip in Chinese property prices, the Chinese would believe that’s a once-in-a-century buy-the-dip type of event, which ultimately became a multi-year decline exceeding 30% in many tier-2 and tier-3 cities.
That doesn’t mean that some won’t try to sell on the down low and get their money out of China through hell or high water.
Some certainly will. China made it clear they didn’t want their citizens investing in overseas assets. I know of the odd millionaire spinning out a random credit card to put a down payment on a house in Vancouver.
What this does scream is policy error big time, an overtightening that could result in a hard landing that is ruinous for global growth.
That would be the worst-case scenario, and I would put that at 10%, which in hindsight proved directionally correct, though slower and more structural than abrupt.
Why is this company systemically important?
Evergrande was once China’s darling real estate developer. Now, it has defaulted, been restructured, and effectively dismantled.
It was founded in 1997 by Xu Jiayin. It has completed around 1,300 commercial, residential, and infrastructure projects, and at its peak, employed over 200,000 people directly, with millions indirectly exposed.
The company’s success came because it was aligned perfectly with the parabolic boom in real estate that has been driven by the last two decades of staggering Chinese growth, growth for a country that is unparalleled in all of modern human history.
The tragedy in all this is that over 1.6 million Chinese put deposits down on homes that hadn’t been built, and this was more often than not their entire life savings.
Most likely, it is they who held the bag, many of whom faced long delays, partial recoveries, or state-mediated completions.
Better them than me.
For a soft landing to happen, the Chinese government has selectively intervened while still allowing developers to fail.
Even though I categorize this as a quasi-gray swan, opposed to a solid black swan, it is highly likely that it did not spill over into the broader global market, and when large bitcoin dips occurred, bitcoin buyers were ultimately gifted lower prices to enter.
These opportunities were few and far between in that cycle, and I can guarantee that MicroStrategy CEO Michael Saylor went on to repeatedly execute additional bitcoin purchases, often financed with corporate paper.
Limiting the fallout proved more complex than initially assumed, with piecemeal liquidity support and moral-hazard constraints shaping policy responses, plugging holes before they became unpluggable, not unlike our own debt ceiling mess.
The larger issue remains to ponder. Was this the tip of the iceberg?
The silence and lack of major actions from policymakers made everyone nervous at the time, but most likely, they were managing it quietly through state banks and local governments.
The response was largely driven by the People’s Bank of China, which initiated targeted liquidity operations that became a multi-year pattern rather than a single rescue event.
Evergrande was ultimately confirmed to have over $300 billion in liabilities, more than any other property developer in the world. At its peak, it was a beast in China’s high-yield dollar bond market.
A lackluster response to an already expensive market proved costly, with real estate still estimated to account for roughly 35 to 40% of household assets in China despite price declines. At the time, home sales by value showed their sharpest drop since the onset of the coronavirus.
Isolating Evergrande became a point of emphasis for the Chinese Communist Party, using the firm as a scapegoat for sky-high property prices.
They were the fall guy.
This was more of a political show than anything else, a show of power, letting the world know that this economic pain was nothing to even bat an eyelid about.
Bitcoin, perceived as a riskier asset along the risk curve, was not immune from sell-offs, and risk-off sentiment contributed to episodic drawdowns during the 2021 to 2022 cycle.
I had faith in the Chinese government’s authority to contain systemic fallout, and while $40,000 proved only a temporary reference point for Bitcoin, the asset ultimately moved through a full cycle drawdown before reaching new highs in subsequent years.
Short-term relief rallies did occur as headlines improved, though always within a broader macro tightening cycle.
This episode should be understood as part of a standard risk reset, where a 5% equity drawdown translated into roughly double that in crypto volatility.
Booking some of those gaudy profits earlier in the cycle to lower cost basis while deploying capital at lower levels ultimately proved to be the correct play.
